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By Thomas Alonso and Tajinder Dhillon
As we enter the 21Q4 earnings season, growth rates remain strong but continue to decline from near-record levels we saw in 21Q2.
21Q4’s current profit growth rate of 22.4% could be the last quarter of double-digit growth before moving to more reasonable year-over-year (YoY) growth rates as the COVID drag on profits is starting to be exceeded (see Annex 1).
Chart 1: S&P 500 growth rate year-on-year
Refinitiv I / B / I / O data
Of the 20 companies that have released 21Q4 results so far, 70% have beaten analysts’ expectations, which is below the previous four quarters average of 83.9% but still well above average long term of 65.9%. The beat amplitude, as defined by the Profit Surprise Factor, is 7.0% so far, well below the previous four quarters average of 16.0% but ahead of the Profit Surprise Factor. long-term average surprise of 4.1%.
Although it is still early in the base period, if the surprise factor remains around the 7.0% level, we expect 21Q4 earnings growth to improve from 22.4% to 30.7%. , which gives an improvement of 8.3 percentage points (PPT).
This will contrast sharply with 21Q1 and 21Q2 where earnings growth improved significantly throughout the quarter by 28.5 and 30.8 points respectively. The 21Q3 also saw a strong improvement in profit growth throughout the quarter, improving by 13.2 ppts
At this point, 21Q4 earnings growth expectations have remained stable over the past two months, rising from 22.2% on October 29 to 22.4% on January 7, an improvement of 0.2 ppt as shown. Table 2. In a typical quarter, year-over-year growth expectations decline. averaging 3.3 percentage points (ppts) between the start of the quarter and the start of the earnings season.
This is a stark contrast to 20Q3-21Q2, where earnings growth improved as the earnings season approached as analyst estimates were overly pessimistic during the height of the pandemic.
Perhaps the explanation for this quarter’s behavior change can be traced to heightened reserve among analysts in raising estimates excessively given the current headwinds of the Omicron variant, chain bottlenecks in the industry. supply, rising inflation and potential Federal Reserve rate hikes.
Figure 2: Change in the growth rate of the S&P 500 as the earnings season approaches
Refinitiv I / B / I / O data
High energy expectations continue
Figure 3 shows the profit and revenue growth rates for 21Q4 at the index and industry level. The energy sector growth rate is currently projected at 10,527.1%, which is by far the highest sector growth that is expected to be the highest annual growth rate for the sector since Refinitiv started operating. tracking this data. This follows the energy sector’s 1798.0% year-on-year profit growth in Q1 3, as the sector continues to recover from the collapse in oil prices last year.
Chart 3: Growth rate of the S&P 500 to 21Q3
S&P 500 Profit Scorecard January 7, 2022
From a profit contribution perspective, the sector is currently expected to contribute 7.94 percentage points to the index’s growth rate of 22.4%, by far the highest of any industry. This despite having the smallest number of companies of all sectors in the index (21) and being only the 8th largest sector by market capitalization.
Next come information technology (4.14 ppts) and healthcare (3.12 ppts). These three sectors alone are expected to contribute nearly 70% of the overall growth of the index (15.2 percentage points on the earnings growth rate of 22.4% in 21Q4).
The energy sector is expected to post the best earnings growth over the next few quarters, with earnings growth currently forecast at 166.5% in 22Q1 and 60.7% in 22Q2. However, as we reach the end of 2022, year-over-year comparisons will become more difficult and growth rates are expected to turn negative. It remains to be seen whether the continued rise in energy prices will change the outlook for 2H22.
Monitor earnings in 21Q4
As is generally the case, earnings growth should be driven by a handful of components. Table 4 highlights the top 20 constituents that have the greatest Contribution to Revenue (PPT) along with Expected Report Date, Average Estimate, Smart Estimate, and Planned Surprise (PS).
This basket of constituents is currently expected to contribute 13.9 ppt to the earnings growth rate at the current index level forecast for 21Q4 of 22.4%, or nearly 62% of the total index growth.
Exhibit 4: Monitoring 21Q4 Profits
Refinitiv I / B / I / O data
Energy (5), healthcare (4) and industry (4) are the most represented sectors in the top 20 contributors to growth, with forecasts from Exxon Mobil (XOM), Chevron (CVX ) and Moderna (MRNA) in the lead. 3 biggest PPT contributors.
It will be important to pay attention to the SP, as this will help predict any significant earnings surprises that will ultimately impact the trajectory of the index level growth rate.
The PS compares the StarMine SmartEstimate to the consensus average. By overweighting analysts who are more precise and timely, SmartEstimate provides a refined view of consensus. Comparing the SmartEstimate to the mean estimate leads to our PS, which accurately predicts the direction of gains surprising 70% of the time when the PS is above or below 2% / – 2%.
Within this basket, 8 components should show positive earnings surprise while only one component should show negative earnings surprise.
A look at 2021 and 2022
Using the EARN app in EIKON, we can see how the 2021 and 2022 EPS estimates for sectors and the S & P500 as a whole have evolved. In Table 5 we show the year-over-year EPS growth rates for sectors and the S & P500 as a whole, 1 day ago, then 9/30/2021, 6/30/2021, / 31 / 03/2021 and 12/31/2020.
After rising for most of the year as a result of strong results, 2021E EPS for the S & P500 as a whole actually declined in the last quarter, although estimates remain at a very good 42.2%. year-on-year. The recent decline could be due to the impact of rising raw material costs and supply chain disruptions during the quarter, as well as the more recent impact of the Omicron variant on the business. That said, note that the EPS expected for 2021 is up 17.7 ppts since the end of 2020.
Table 5: WIN Application Data for YoY EPS Growth
Refinitiv Eikon workspace
We continue to see strong 2021 results impacting 2022 growth rates, with the expected growth rate falling to 8.5% from 16.0% at the end of the first quarter of 2021, according to Table 6.
Table 6: WIN Application Data for YoY EPS Growth
Refinitiv Eikon workspace
As we have noted in the past, the decline in EPS growth in 2022E is not a function of declining earnings, but rather a denominator effect of stronger growth in 2021 compared to 2022. The Calculation of bottom-up EPS from our This Week In Earnings report (available here) shows that as of 7/1/2022, 2022 bottom-up EPS is expected to be $ 223.35 / share, up 14.5% from 195 , $ 14 / share at the start of the year, but lower than the 23.0% growth in 2021 estimated over that same period (see Exhibit 7).
Figure 7: Bottom-up EPS estimates from the S&P 500
Refinitiv I / B / I / O Data
Editor’s Note: The bullet points for this article were chosen by the editors of Seeking Alpha.